Looking at human emotion and the stock market crisis

It is during times like these that I am reminded of two observations on life and the markets.

First in the context of life, our most worrisome times always happen at night. Whether you are worried about your portfolio or the health and safety of a family member, that anxiety always seems to peak around 2 or 3 AM as you awaken for some inexplicable reason and then spend an hour or so thinking about the worst case scenarios. Fortunately things do look better in the morning because we can then get up and do something to reduce that anxiety. For me often times those wakeful hours are fairly productive as I rethink strategies, conversations or steps that I am implementing. It also helps that as you age, I think you can get by on less sleep. I don’t have any good advice for you regarding those wakeful nights, but perhaps the discussion that follows may help in some way

Living with these markets this last year, it is relatively easy to let emotions sway your thoughts and actions. In my college days as a psychology minor I managed to gather enough information about human behavior to get through the required courses, and now I find myself building on that foundation that was put in place early on. If you are going to be an investor, you have to be a student of human behavior. The other day I was complaining to a client about Treasury Secretary Paulson’s decision to put a 35 year old former engineer in charge of the $700 billion rescue plan. I have do doubt the guy’s intelligence quotient is off the charts, but a comment he made about this financial crisis being much like an engineering problem disturbed me. Engineering problems while complex don’t have that volatile human behavior factor in them like the markets do. Just because the solution you have engineered to fix the financial problem should work, the inability to predict what the human aspect of the markets will do in reaction to the solution can be the ultimate undoing of the solution.

In a more personal aspect of human emotion and the markets, consider that all of us are affected by what we hear and see in the media every day. When we see crazy Jim Cramer going off, it affects us. When we see the headlines in the paper describing the record decline in the markets, it affects us. When we look at our investments statements every day, it affects us. By the way, you get a free pass there from me. You don’t have to look at your statements every day, but I do. These entire external factors do little except get us all worked up, and when we get worked up we can say and do things that we may ultimately regret down the road. So here is a suggestion I would heartily recommend during tough times like this. First don’t watch the talking heads, ignore the doomsayers and as I already suggested, don’t look at your investments every day. Instead watch reruns of Andy Mayberry or the Beverly Hillbillies. Allow yourself to laugh a bit. If that doesn’t work then ask yourself a simple question when your first instinct is to sell everything and put it in your mattress. Ask yourself why am I feeling this way? The only way to counter the emotion is to get facts in hand. Do a little research or better yet, call us up and have us send you information that will help overcome the urge to head for the hills. It is a very natural emotion to feel fear and want to get away. In fact it is a very healthy reaction if your house is on fire or if you are being chased by a wild animal. However, when it comes to your investments it doesn’t help to have that response. So as we go forward from here, promise yourself that you will remain calm and when you feel that emotional fear rising up, do some research, read our emails or even give us a call. We are here to help.

Now for a little bit of facts to help you out. Let’s assume you are thinking about selling and holding cash. There are two fundamental problems with that. One is you will likely lock in your losses at or near the market bottom. Now if you are in the wrong part of the market that may be a good thing to do, but if you are dealing with a diversified portfolio that probably isn’t the case. The second problem comes along as you try to decide when to get back in. Again human nature is likely to intervene and you will probably wait until you are absolutely certain it is safe to get in the market. By that time you have probably missed most of the recovery and you are now into the mode of selling low and buying high. As wealth advisors we obviously don’t want you to do that and we want to help you in these times by providing facts and figures to help you overcome those feelings. To that end here is an article that you can use to see how important it is to stay in the game and not on the sidelines.

Have a great rest of the month and if the markets don’t improve significantly in the next few weeks, at least we can be thankful the elections will be over….

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Discuss this article

cc33October 21, 2008

Don’t look at your investments everyday? That is a tall order in such times.

EvergreenOctober 21, 2008

I think what the author is getting is that investing is a long term strategy. We all need to think long term. We cannot allow emotion to run mathmatical analysis. Facts over feelings. If you try to play the guessing game in the market you end up gambling and not investing. Time is on your side, use it.

TrevorOctober 21, 2008

Go ahead CC33, and sell your stocks now, I would gladly buy them now at the low price. Get my drift.

DavidOctober 21, 2008

Good news, oil is dropping this week. So everyone should stand back and see the whole picture.